People Respond to Incentives In Predictable Ways'

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People Respond to IncentivesIn Predictable
Ways.
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INCENTI VE

• Action or policy that encourages individuals
  to act in a particular way by increasing the
  benefits of their actions

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DISINCENTIVE

• Action or policy that discourages individuals
  to act in a particular way by increasing the
  costs of their actions

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Monetary Incentives

• Characteristics
• Freedom to choose
• Inexpensive to administer
• Involves monetary cost
• can cause perverse results, e.g. cheating

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Perverse Incentives

• Incentives that result in unintended negative
  secondary effects
• Rent controls
• Agricultural price supports
• Pay for
• crime reduction
• informers
• urban housing

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Trash Generation and Recycling
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The problem

• Trash disposal space is scarce.
• In many areas, trash disposal has no monetary
  cost or no marginal cost there is no
  disincentive to produce trash.
• People overuse trash disposal services and space.

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The Solution

• Provide monetary disincentives to generate trash
  at the margin.
• For example, first container costs 4, second
  costs 10, third costs 25.
• Sell trash disposal bags, only acceptable
  receptacle for trash for pickup
• Allow a market in bags.

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Possible Secondary Effects

• people will burn (cost)
• people will dump trash in unauthorized areas
  (cost)
• people will create compost (benefit)

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Recycle

• As much as 90 of our trash can be recycled
• Costs include the labor to separate, the cost of
  the containers, and separate pick-up.
• Some of the costs are repaid by the recycling
  firm, but usually not enough to provide
  sufficient monetary incentives for people to
  recycle.

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The Solution

• Provide incentives to recycle
• trash collectors pick up separated recyclables
• following the law of comparative advantage,
  people recycle at trash collection center
• there are costs involved with recycling
• continue recycling as long as mb greater than moc
  

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The economists approach

• Increase the cost of the bad - trash production
  
• Decrease the cost of the good recycling
• Use the law of comparative advantage
• Continue the activity as long as the marginal
  benefit is greater than the marginal opportunity
  cost

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Water and Incentives
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Farmers, Water, and Incentives

• Farmers account for 85 of water usage in
  California
• Water is subsidized farmers pay less than 10 of
  market rates.
• Old watering techniques waste 50 or more of the
  water
• New watering equipment has a cost (disincentive).
• No incentive exists to invest in this equipment
  because the cost (disincentive) of water use is
  so low

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How to Conserve Water

• Increase marginal water cost to farmers
  (disincentive)
• Result as the cost of water rises, farmers will
  use less water
• Farmers use more efficient irrigation
• Farmers switch to less thirsty crops
• Institute marginal usage fees for households

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The Economists Approach

• If water usage in California is a problem
• stop charging below market prices to farmers
• stop charging zero marginal cost to households
• Recognize that there will be secondary effects
• some farmers are likely to leave agriculture
• other farmers may enter, growing less water
  intensive crops

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Incentives and Organ Donors
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Addressing the Organ Shortage

• People are dying because others refuse to donate!
• No incentive, besides being a good Samaritan,
  exists.
• What incentives might induce people to supply
  organs?

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Incentives for organ donors

• Pay burial expenses
• Pay 1000 cash to the family
• other

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Possible Secondary Effects

• Incentives exist for medical personnel to cut
  your life short.
• Depending on incentives, family members may have
  incentives to cut your life short.
• The poor may have greater incentive to donate
  than others.

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Property rights conserve and develop resources

• Your desk
• Your walls at home vs. your walls at school.
• Your dog and your lawn at home vs. your dog and
  the lawn at the city park.

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Incentives to Workthe Colonial Experience

• 1620 - Plymouth Plantation held in common
• One person from each family was expected to work
• Families were given food according to the number
  of people in their family
• It was thought that there was gold in the
  vicinity
• Half died after first winter
• 1623 - private property established
• The colony flourished

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To Provide Incentives to Produce, Establish
Property Rights

• the women now wente willingly into ye field and
  took their little-ones with them to set corne,
  whom to have compelled would have been thought
  tiranie and oppression.

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Jamestown

• Each settler receives the same share of
  the crops but not all work.
• English gentlemen settlers think themselves
  above work. As long as Governor exempts them
  from work, there is no incentive to work.
• Settlers starve
• Captain John Smith forces gentlemen to work
  (very strong incentives).
• The Starving Times end

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Main Points

• An incentive is an action or a policy that
  encourages individuals to act in a particular way
  by increasing the benefits of their actions.
• A disincentive is an action or policy that
  discourages individuals to act in a particular
  way by increasing the cost of their actions.
• Incentives can be both monetary and non-monetary.
  

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Main Points

• Perverse incentives encourage people to act in
  socially undesirable ways.
• Trash production can be reduced by increasing the
  cost recycling can be increased by decreasing
  the cost at the margin.
• Water usage can be reduced by charging full
  market price to farmers and by increasing the
  cost at the margin to households. There will,
  however, be secondary effects that some would
  consider to be negatives.

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Main Points

• Providing incentives for organ donations will
  increase the amount of organs available but will
  have secondary effects.
• Policies meant to encourage people to work can be
  effective but they must ensure that the secondary
  effects are not perverse.
• In general, social policy should
• provide effective incentives
• investigate all secondary effects
• continue the policy as long as the marginal
  benefits are greater than the marginal
  opportunity cost.

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How do incentives and disincentives affect you?

• Your studying
• Your entire grade is based on the final. How much
  do you study before each class?
• You have a quiz every class. How much do you
  study before each class?
• Overtime
• Your boss pays you your regular wage for
  overtime. How much overtime do you work?
• Your boss pays you double for overtime. How much
  overtime do you work?

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How do incentives and disincentives affect you?

• You are being paid 5 for each A. How hard do you
  work?
• You are being paid 1000 for each A. How hard do
  you work?
• If you fail this test, you will have to take it
  over. Do you cheat?
• If you fail this test, you will be asked to leave
  CSUSB. Do you cheat?

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How do incentives and disincentives affect you?

• If you come to class, you get to take the
  quizzes.
• If you come to class, you sometimes get extra
  credit points.
• If you stay in class to the end, you sometimes
  get extra credit points.
• If you dont come to class, you dont get any of
  the above.

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Policy Implications

• If you want people to do more of an activity,
  change the incentives by increasing the marginal
  benefit or decreasing the marginal cost of the
  activity.
• If you want people to do less of an activity,
  change the incentives by ________________________
  ______________________________________________

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Policy Implications

• People respond to incentives in predictable ways.
  Marginal incentives work.

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Using incentives and disincentives, design a
policy to

• induce teachers to teach well
• induce students to learn in school
• induce able-bodied welfare recipients to go to
  work
• induce high school students to care for classroom
  furniture
• induce farmers to leave farming
• train people to enter the work force